Your record of paying debts on time, as agreed under the terms of your loans or credit cards, is the single most important factor used in calculating your credit scores. So maintaining a pristine payment history (or rehabbing a spotty one) can help improve your credit standing over time. Here’s how to improve your payment history and help boost your credit scores.
How Payment History Affects Your Credit Score
Payment history is the single biggest factor that contributes to your FICO Score, the credit score used by 90% of top lenders; it’s responsible for about 35% of your score. That means establishing and maintaining a spotless record of on-time debt payments is the single most important habit you can adopt to promote a strong credit score. It also means that—except for major credit missteps such as allowing unpaid bills to be turned over to collections, foreclosure or bankruptcy—nothing hurts your credit score more than a late or missed payment. For the purposes of your credit reports and the credit scores based on them, a late payment is one that’s 30 days overdue—and the first time one appears on your credit report, it can cause a significant drop in your credit score. Late payments typically remain on your credit report for seven years, but their effect on your credit scores wanes over time.
While lenders won’t report payments made a few days late to the credit bureaus, they may charge you a penalty for missing the due date, so there’s ample reason for getting your bills paid on or before their due date.
Which Bills Count Toward Your Payment History?
The types of accounts considered for credit payment history are those that involve repaying borrowed funds, including:
- Credit cards: Paying your minimum monthly payment before the due date is essential to keeping your credit card account in good standing. Making payments greater than the monthly minimum can help you save on interest charges and potentially boost your credit score, and paying on time will spare you late fees and penalties.
- Other revolving credit accounts: Personal lines of credit, home equity lines of credit (HELOCs), and any other accounts that let you borrow against a set credit limit and charge interest only on the funds you use are known as revolving accounts. (Credit cards are revolving credit too.)
- Installment loans: Credit reports track payments on all installment loans—those with fixed monthly payments, such as mortgages, student loans and auto loans. When you finish making payments on an installment loan, it will be noted in your credit report as closed in good standing, but its payment history will continue to benefit your credit until the loan is removed from your credit report, usually after 10 years.
- In-store financing: If a merchant such as a furniture store or electronics retailer lets you buy an item on a payment plan, that’s another form of installment credit. The merchant (or the finance company they work with) may report your payments to the national credit bureaus, so they’ll show up on your credit reports and can influence your credit scores.
Non-Debt Payments (Usually) Don’t Affect Payment History
Payments for expenses unrelated to borrowing money such as rent, utility and cellphone bills, don’t automatically influence your credit standing the way debt payments do, but they can affect your credit scores as well:
- Few landlords and property managers do so, but they can report rent payments to the national credit bureaus—and if they do, rent payments may be incorporated into your payment history. Recent versions of the FICO Score and Vantage Score scoring models are designed to consider rent payments if they appear in your credit reports.
- If any bill you fail to pay is turned over to a collection agency, a collection account will appear on your credit report and will adversely affect your credit scores.
Ways to Improve Your Payment History
The following tactics can help you maintain a solid payment history, or start rehabbing one that’s a little spotty:
- Pay on time. This may seem obvious, but the key to a solid payment history is paying your bills on time, every month, without fail. Late payments in your past can’t be taken back, but their effect will diminish with time, so if you move ahead without new missteps, your credit scores and standing will tend to improve.
- Dispute misreported payments. If you made late payments in the past, you just have to live with the consequences—but if you believe your credit reports mistakenly list on-time payments as missed or late, you should consider contacting your lender or going through the credit report dispute process. You may have to furnish the credit bureaus (Experian, TransUnion or Equifax) with evidence of the inaccuracy.
- Avoid underpayment. Late payments are the biggest potential blemish in your payment history, but payments that fall short of the required amount could also mar your credit history. It is better to pay something every month if you can’t make a full payment, but underpaying does damage too. If you have trouble making your credit card payments, avoid using those cards and focus on paying down your balances, at least until the required minimum payment is within reach. On installment loans such as mortgages, car loans and student loans, if you’re having trouble making your full payment, consider reaching out to your lender—ideally before you send in an underpayment—to see if you can work out new terms that lower your monthly obligation. If the lender approves a new financing arrangement, you’ll likely pay more in interest over the life of the loan, but that could be a good trade-off for preserving your payment history.
- Establish a bill-paying routine. If you have trouble remembering to pay your bills each month, scheduling a regular day for all your bill payments can be helpful. Pick a time and day that works for you—the last Sunday of the month, for bills due in the month ahead, for example—and put it on your calendar.
- Let technology help. Most financial institutions let you schedule automated electronic bill payments (autopay), which is a great tool for avoiding late payments. Other tech tools that can help you avoid late payments are digital calendar reminders, alert features found in many credit card issuers’ smartphone apps, and even virtual sticky notes. Any tech you’re comfortable with that stops you from forgetting a payment is a win for your finances and your credit.
Benefits of Paying Your Bills on Time
Getting in the habit of paying your bills on time can pay off in lots of ways:
- Help improve your credit scores. Making all your debt payments on time can go a long way toward helping you build good credit. Lenders view steadily rising credit scores as evidence that you pose less of a risk as a borrower, so as scores increase over time, you gain access to a wider array of loans and credit cards, with potentially higher loan amounts and credit limits and lower interest rates and fees.
- Avoid penalties from your lender. Loan contracts and cardholder agreements typically spell out fees or penalties you must pay if you miss a payment due date by as little as one day. On a first offense you might be able to get a lender to rescind the penalty (it can’t hurt to ask), but those fees can really add up. And credit card penalties are added to your purchase balance, so they can cost you interest charges as well. It’s far less costly to just make your payments on time.
- Worry less. If you don’t have a system for ensuring payments are made on time, you can spend a surprising amount of energy fretting about whether you’ve made this or that payment already this month, scrambling to transfer funds in the eleventh hour, and otherwise sweating over the state of your bills. We all experience anxiety over things we can’t control, and taking charge of a manageable task like bill paying can make your life a little calmer and less stressful.
A healthy credit history can bring some peace of mind and will promote steady credit score improvement. Checking your credit score and report for free through Experian can help you see how improving your payment history can have a positive effect. As long as you pay your bills on time every month without fail, and attend to the other factors that contribute to credit scores, monitoring your credit scores will be a satisfying endeavor.
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